Your DIY Financial Planning Guide

Yes, you can do it yourself.

By Jocelyn Black Hodes, DailyWorth’s Resident Financial Advisor

May 02, 2013

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Your DIY Financial Planning Guide

Ever thought about what life would be like without maps? We probably wouldn’t venture very far because the fear of the unknown would likely hold us back. Planning for a successful financial future can also be scary and overwhelming, especially when you don’t know where to go or how to get there. That’s why many people choose to pay to work with a financial advisor who can help eliminate the confusion and map out a financial plan for them. But that’s not always necessary. If you prefer to do some, or all, of your own financial planning, we’ve got the tools to help you with this simple DIY planning guide.

First step: Get goals!

Financial planning starts with dreaming and then setting goals. You need to know where you want to go before you can decide how to get there. Think about your short-term goals, such as paying off credit card debt in one year; intermediate term goals, such as saving for a down payment on a house in three years; and long-term goals, such as sending your kids to college in 10-15 years and retiring in 30 years.

Write (or type) your goals down and make sure to assign each one a dollar amount and target date. That will help make them more real and hold you accountable. Keep the list in sight to help motivate you as you work toward achieving your goals.

Reality check.

Before you can plan for the future, you need to have a good understanding of where you stand now. Calculate your net worth by subtracting your debts (liabilities like mortgage loan or credit card balances) from the total amount of what you own of value (assets like your retirement and bank account balances). Then calculate what you can reasonably save each month, if anything, after you’ve covered expenses (both fixed, like rent or electric bills, and discretionary, like eating out). Don’t let a negative net worth or monthly cash flow get you down. Be empowered by the fact that this financial planning will get you moving in the right direction so you can turn that around!

Ditch your debt. Too much debt puts you at financial risk and hurts your chances of achieving your goals. If you spend more than you earn, use your budget to identify areas of opportunity for cutting back and make paying off high-interest credit card debt a top priority. If you have multiple debts and managing them is overwhelming, try creating a clear plan of action to pay them off by using this tool.

Be protected.

Financial hazards like an unexpected illness or accident, a job loss, an economic recession and a market downturn are inevitable. You can minimize their financial impact on yourself and your family by having an adequate emergency fund and the right insurances in place. Try to save three to six months’ income in a bank savings account. If you own a house, you can also consider getting a home equity line of credit for emergency use only.

Insure what you cannot comfortably afford to replace. For most people, that means having auto, renters or homeowners, liability, health, disability and life insurance. Chances are you need more coverage than you think. Insurance you get through your employer (if any) should also be supplemented with insurance you buy on your own. Shop around and make sure you buy your policies from a reputable, financially sound insurance company by checking their rating.

Where there’s a will...

Every adult should have a will and a general durable power of attorney, as well as a medical power of attorney and living will (aka “medical directive”), which help lay out your wishes for medical care in case you’re incapacitated. (We know. We don’t like thinking about it either.) You can use an estate planning attorney to draft these documents for you or you can try an online alternative, which can be cheaper.

Tackle taxes. There are plenty of resources online to help you file as needed and maximize deductions. However, if your financial situation is complex, you probably want to hire a Certified Public Accountant who can give you personalized advice and recommend tax-saving strategies that you may not be aware of. Click here to find a CPA near you.

Mo’ Money.

Now it’s time to turn your money into more money. First, educate yourself on the basics of investing, including the differences between stocks, bonds, mutual funds and exchange-traded funds (ETFs), the risks and costs involved, tax implications, and the importance of diversification. It’s important to invest in something you understand.

Next, set up separate accounts for each of your goals. Each goal will likely require a different investment strategy because of differences in time horizon, risk tolerance, and growth expectations. You’ll help yourself tremendously by setting up automatic monthly contributions to each account, choosing low-cost investments, and maximizing savings in tax-advantaged accounts like 401(k)s, IRAs and 529 college savings plans. (But keep in mind that student loans are available but retirement loans are not. Most financial experts agree that you should always pay yourself first!)

If reading all of this makes you dizzy, you may be better off working with a qualified financial advisor. You can find affordable financial planning services on sites like NestWise or search for Certified Financial Planners in your area here.